Aswath Damodaran 239
Disney Theme Park: Project Analysis in Baht
! The inflation rates were assumed to be 10 % in Thailand and 2 % in the United
States. The Baht/dollar rate at the time of the analysis was 42. 09 BT/dollar.
! The expected exchange rate was derived assuming purchasing power parity.
Expected Exchange Ratet = Exchange Rate today * ( 1. 10 / 1. 02 )t
! The expected growth rate after year 10 is still expected to be the inflation rate,
but it is the 10 % Thai inflation rate.
! The cost of capital in Baht was derived from the cost of capital in dollars and
the differences in inflation rates:
Baht Cost of Capital =
= ( 1. 1066 ) ( 1. 1 / 1. 02 ) - 1 =. 1934 or 19. 34 %
!
(1+US $ Cost of Capital)(^1 +( 1 Exp Inflation+Exp InflationThailand)
US)
" 1
Note that the expected exchange rate reflects purchasing power parity.
Many companies in Asia, during the early 1990s used the current exchange rate
to forecast future cash flows, because governments in these markets had pegged
their currencies to the dollar (essentially promising a fixed exchange rate).
While this held up for a while, the differences in inflation eventually caused the
local currency to collapse, taking many real projects down with it.
